Why real estate rules for NRIs need to be simplified

There seems to be a fundamental flaw in the way some of the income tax provisions are administered that hurts non-resident Indians' real estate investments in India, says Harsh Roongta.

Illustration: Dominic Xavier/Rediff.com

Recently, I received a call from a client, namely Nitin.

He is an Overseas Citizen of India based in the UK.

The income tax department, through an email, had asked to link his PAN number with Aadhaar before December 31, 2019, or his PAN would be made inoperative.

Despite my assurance that he would not be affected, as he was anyway not eligible for an Aadhar card, he was worried that his PAN would be made inoperative, making it difficult to operate his Indian bank accounts.

I mollified him that the PAN number cannot be made inoperative without following a process mentioned in Section 139AA (2).

And an online search revealed that no such process had yet been notified.

However, the provision to make PAN inoperative was to be made effective from December 31, 2019, itself (since extended to March 31, 2020).

There seems to be a fundamental flaw in the way some of the income tax provisions are administered that hurts non-resident Indians' (NRI) real estate investments in India.

Let's take two examples.

When an individual rents a property from an Indian resident, there is no tax deduction at source (TDS) unless the rent exceeds Rs 50,000 a month.

And if it does so, the TDS of 5 per cent of the annual rent is payable as a single payment.

However, if the landlord is an NRI, the tenant needs to register for TAN, deduct tax and pay the TDS every month and file quarterly TDS returns.

Since the rate of TDS is unclear, so most tenants would just deduct 42.744 per cent (the maximum marginal tax rate in India).

Many NRI property owners simply declare themselves as a resident in the rental agreement.

The tenant also agrees because he cannot find out officially whether the landlord is an NRI or not.

Similarly, when somebody purchases a property in India (over Rs 50 lakh) from a resident seller, the buyer must deduct 1 per cent (of the gross amount) TDS and pay it to the department.

However, when such a property is purchased from an NRI, then apart from all the steps outlined above for rent, the buyer must compute the actual capital gains on the sale by asking the buyer details of his cost price and verify it and deduct long-term capital gain tax with the highest possible surcharge.

Many buyers simply deduct 28.50 per cent and leave it to the seller to claim the appropriate refund.

When asked about such ridiculous TDS requirements, the tax department points to the provisions allowing either the buyer or the seller to obtain a certificate for lower deduction at source.

This process has also been made electronic, they claim.

But this makes it difficult for any NRI to sell property in India.

There is no reason why the TDS provisions are not bought within the ambit of this self-certification and automatic payment (without the requirement to register for TAN).

The real estate sector can get a leg up from NRIs, and simplification of rules will promote some investment.

Harsh Roongta is a Sebi-registered investment advisor.